Fair Lending: State Responses to Moves at the CFPB

This Post is a “Part II” to our recent blog post describing the CFPB’s current plans to consider new rules that may narrow lenders’ exposure to “disparate-impact” liability under the Equal Credit Opportunity Act (“ECOA”), as well as other federal developments along the same lines, particularly with respect to auto lending. Today, we report on important countervailing developments at the state level, which indicate a more aggressive fair lending enforcement posture. Particularly because state laws can impose disparate-impact liability without regard to how the CFPB or the U.S. Supreme Court may interpret federal law, vigilance as to these developments is warranted.

Any review of state-level developments must account for important changes from the elections results this month at the state level. Democrats, who historically have taken a more activist position on fair lending, flipped the attorney general’s office from Republicans in four states (Colorado, Michigan, Nevada and Wisconsin), which will mean that for the first time in the recent past a Democrat will be the top prosecutor in a majority of U.S. states. Given how often state AG enforcement matters require coalitions of cooperating AGs to pool resources, these developments can make state enforcement actions more likely.

Many of these “blue state” AGs had already expressed their “grave concerns” about indications that the CFPB may be retreating from prior positions on disparate-impact liability, particularly in the auto lending space. In a letter to Acting CFPB Director Mulvaney, those AGs also stated their intent to fill any gap created by changes at the Bureau, so as to “ensure nondiscriminatory lending to the residents of our states,” including by enforcing their own states’ prohibitions on disparate-impact discrimination. Just before sending that letter, the AGs made those same points in a letter to the U.S. Department of Housing and Urban Development (HUD) urging that HUD not tinker with its disparate-impact rule under the Fair Housing Act. Both letters emphasize that regardless of disparate-impact developments at the federal level, states still have their own disparate-impact liability laws under which they can bring, and have brought, enforcement actions.

The states also have taken more concrete steps in response to federal developments. For example, the New York State Department of Financial Services recently issued new guidance on New York’s Fair Lending Law, with a press release that explicitly linked it to statements by the CFPB. The agency reiterated that under New York law, lenders still face liability on a disparate-impact basis, including specifically “for any discrimination that may result from markup and compensation policies with third parties such as car dealers.”

Importantly, however, when it comes to imposing data collection requirements to facilitate fair lending enforcement, state power is not unlimited. In particular, there are now serious concerns that a recent change to Connecticut law on that subject is preempted by ECOA. The amendment purports to require auto lenders, in all instances, to collect information on loan applicants’ race, gender and ethnicity. Under prior law, lenders had only been required to record that information “if known.” The change appears generally inconsistent with, and in this case would therefore be preempted by, ECOA’s implementing Regulation, Regulation B. Regulation B, subject to various narrow exceptions, generally prohibits lenders from asking an applicant to identify his or her race, sex, and ethnicity (as well as certain other protected characteristics, like religion). 12 C.F.R. § 1002.5(b). Because of the preemption concerns, the Connecticut Banking Department recently published a memorandum stating that it would be taking a “no-action” position, and therefore not enforcing, the new law until further notice. The agency also indicated that it has submitted a formal request to the CFPB for an Official Interpretation as to whether the new law is preempted by Regulation B.